Negative Gearing Calculator

Negative gearing is a property investment strategy where the rental income from a property is less than the interest expense on the loan used to purchase it. This creates a tax deduction that can be used to offset other income, potentially reducing your taxable income and increasing your after-tax cash flow.

What is Negative Gearing?

Negative gearing occurs when the rental income from a property is insufficient to cover the interest payments on the mortgage. In Australia and New Zealand, this situation can be beneficial because the interest expense can be deducted from your taxable income, potentially reducing your tax liability.

The term "negative gearing" comes from the idea that the property is "gearing" your income (in this case, your rental income) against the interest expense, creating a negative cash flow position that can be used to your advantage for tax purposes.

Negative gearing is a tax strategy and not a financial product. The benefits depend on your individual tax situation and local tax laws.

How Negative Gearing Works

The process of negative gearing involves several key steps:

Purchase the property: Buy an investment property with a mortgage.
Generate rental income: Rent out the property to tenants.
Pay interest on the mortgage: The bank charges interest on the loan.
Claim the interest deduction: Deduct the interest expense from your taxable income.
Reduce your tax liability: The deduction can lower your tax bill.

The key to successful negative gearing is ensuring that the rental income is less than the interest expense, creating a tax benefit. The difference between the interest expense and rental income is the amount that can be deducted from your taxable income.

Negative Gearing Ratio = (Interest Expense - Rental Income) / Rental Income

Negative Gearing Calculator

Use our negative gearing calculator to determine the potential tax benefits of negative gearing. Simply input your property details and see how much you could save on taxes.

Negative Gearing Formula

The negative gearing formula is straightforward. It calculates the difference between the interest expense and the rental income, which represents the tax deduction you can claim.

Tax Deduction = Interest Expense - Rental Income

Negative Gearing Ratio = (Interest Expense - Rental Income) / Rental Income

Where:

Interest Expense is the amount of interest paid on the mortgage.
Rental Income is the monthly income from renting out the property.

Negative Gearing Example

Let's look at an example to illustrate how negative gearing works.

Description	Amount
Property Purchase Price	$500,000
Loan Amount	$400,000
Interest Rate	5%
Monthly Interest Expense	$1,666.67
Monthly Rental Income	$1,500
Tax Deduction	$166.67
Negative Gearing Ratio	11.11%

In this example, the property owner is paying $1,666.67 in interest each month but only receiving $1,500 in rental income. The difference of $166.67 can be deducted from their taxable income, resulting in a negative gearing ratio of 11.11%.

Negative Gearing FAQ

What is negative gearing?

Negative gearing is a property investment strategy where the rental income from a property is less than the interest expense on the loan. This creates a tax deduction that can be used to offset other income, potentially reducing your taxable income.

How does negative gearing work?

Negative gearing works by allowing investors to deduct the interest expense on their property loan from their taxable income. This can reduce the investor's tax liability, even if they are not earning enough rental income to cover the interest payments.

Is negative gearing legal?

Negative gearing is legal in Australia and New Zealand, where it is a recognized tax strategy. However, it is not a financial product and the benefits depend on your individual tax situation and local tax laws.

What are the risks of negative gearing?

The main risks of negative gearing include the potential for capital losses, which can occur if the property value decreases. Additionally, negative gearing can be complex and may not be suitable for all investors.

How can I calculate negative gearing?

You can calculate negative gearing by subtracting the rental income from the interest expense on your property loan. The result is the amount that can be deducted from your taxable income.